One of the many products the car dealership Finance Manager may try to sell you is Gap insurance. Gap insurance covers the difference between the value of your car and what you owe on it in case the car is declared a "total loss" by your insurance company due to a wreck, it being stolen or some other catastrophe such as fire, flood or storm damage.
Most people who finance or lease a vehicle owe a lot more on their car then the vehicle's actual book value. This is especially true if you traded a vehicle that you still owed money on. Some people will go through this cycle several times until they owe so much on their current vehicle that their pay-off is hopelessly higher than the actual value of their current vehicle. In the car business this is know as being "Upside-Down!"
A JD Power study finds 38% of trade-ins are "Upside-Down." This is up from 25% in 2001. This percentage will continue to increase.
It is also reported that the amount owed on "Upside-Down" car loans averages $ 3,763. That's the amount over and above the vehicle's actual value.
So, if your car is totaled from an accident, from being stolen or some other covered catastrophe your insurance company will only pay the book value to cover your claim. If you owe more money on the vehicle than they give you there's a "GAP" that you must pay off.
In other words, you may end up owed several thousand dollars or more on a vehicle that has been declared a total loss by your insurance company. Once your vehicle is declared a total loss it becomes the property of the insurance company.
Gap insurance covers this "GAP" or difference so you do not get stuck owed money on a car that you do not have anymore. It's a good thing to have, but you do not want to buy it from the car dealer! They will mark the price of it up $ 500 to $ 1,000 over the actual cost of the coverage!
Automotive News reports that car dealers make substantial profit when selling Gap Insurance!
A much less expensive alternative is to purchase Gap Insurance online where you do not have to worry about being over-charged by your car dealer.
The following is an example of how Gap Insurance works:
- You Purchase a new $ 25,000 vehicle.
- Your vehicle is totaled 12 months later.
- Your loan balance is $ 22,000.
- Your car insurance company settlement is $ 17,000.
- Your Deductible is $ 500.
- Your car insurance company's final settlement is $ 16,500.
- Gap Insurance Pays $ 5,500.
A Note For People Who Lease a Vehicle:
Even though GAP insurance is important for people who buy cars, it is essential for those who lease. Gap Insurance basically originated with car leasing.
The upside-down nature of a typical car lease is even greater than a purchase situation, because the lessee usually had no trade-in equity and put little or no cash down. Similar to a purchase, if the car is a total loss you owe the difference between the book value of the vehicle and what you owe on the balance of the lease. You will always owe more so get GAP!